Guest Interview:

Deutsche Bank Invt. Mgt.

31 West 52nd St.
New York,NY 10019

Interview Quarter: 2Q1994

Van Schreiber

Managing Director

Q: Your company goes back quite a few years. What is the history of C.J. Lawrence?

A: C. J. Lawrence was founded in 1864 as a Wall Street research boutique. I have been a part of that history for almost thirty years. When I first joined the firm the managing partners were dedicated to discovering sound investment opportunities for the firm's clients and we continue to do so today. We realized then that because of the growth of pension funds, institutional investment in securities would be the wave of the future. How right we were to formalize a dedicated research staff to service institutional investors. The Asset Management group began managing tax-exempt funds in 1952. The portfolio managers concentrated on the firm's investment research to identify profitable investments for clients' portfolios. Morgan Grenfell further strengthened the group in 1986, and the affiliation with Deutsche Bank in 1990 served the Asset Management division very well. In 1993, C.J. Lawrence Investment Management merged with Deutsche Bank Capital Corporation to form the C.J. Lawrence Deutsche Bank Securities Corporation. We currently manage $2.9 billion.

Q: Generally, how would you describe your growth investment strategy?

A: Our general investment strategy is to anticipate major structural and thematic shifts in the U.S. economy and to profit from appropriate investments as these changes materialize. Additionally, we do a very thorough review of the companies that we are considering investing in so that we can be satisfied with all aspects of their operation and management. We end up with a list of very powerful companies exhibiting far above average earnings growth. Our intent is to remain invested in these companies for several years, over which time significant capital gains can be achieved. We tend to keep our winners and to sell our losers. For us, this approach has worked beautifully.

Q: What is your Market Monitor and how does it work?

A: The CJL Market Monitor is an aggregate of seven indicators whose composite reading has demonstrated a high level of correlation with the major movements in U.S. stock prices. We have assigned specific parameters for the model to determine its buy, hold, or sell rating. For each component, a buy, hold, or sell rating receives a score of +1, 0, and -1 respectively. The Monitor is a sum of these results. A total of better than +1 is a buy, less than -1 is a sell, and between +1 and -1 represents hold territory. The seven components are: 1) Earnings yield/T-bill ratio, 2) Cash flow yield/long bond yield spread, 3) CJL dividend discount model, 4) Discount rate/T-bill, 5) Long-term government bond model, 6) the NYSE moving average, and 7) the NYSE advance/decline line

Q: How exactly does the economy influence your decision making?

A: Trends and shifts within the economy are hugely significant in creating desirable or undesirable investment areas. It is not so much the macro-economic numbers that are important to us. For example, is real GNP up 1.5% or 2.2.%? Rather, it is the patterns underneath the big numbers. Is consumer spending accelerating or easing off? Are plant operating rates finally high enough that price increases will stick? Are inventories starting to build up? Are interest rates rising further? What are the major technological developments? The big macro-numbers often do not capture the major differences in sector performance-both positive and negative. We want to identify the themes and trends that are having real impact. Often these trends will last longer and have far greater consequences than observers would have initially thought. We invest in these trends, creating a universe of companies from which we isolate the 20-30 best in order to construct our portfolios.

Q: Do you use asset allocation as part of your investment strategy?

A: Only insofar as equity/cash trade-offs are concerned. We use the C.J. Lawrence Market Monitor as our guide. James Moltz, our Chief Investment Strategist, designed the Market Monitor to anticipate major shifts in U.S. stock prices. The Monitor has been extremely accurate and is an integral part of our asset allocation decisions on an on-going basis. Our clients will have low cash positions when the Monitor is positive, and vice-versa. For example, when we are concerned about the market we will have cash at 25% or more of our portfolios, assuming the client has given us a green light to do so. New clients acquired during the time the Market Monitor is in a negative phase will be invested gradually until they reach our targeted equity/cash levels.

Q: Van, you seem to be the primary force behind the success of the Premium Growth Equity product. Is that true?

A: I have been managing growth assets since the early 1980s, and I instituted the principles behind the Premium Growth style. Obviously, one person cannot manage the portfolios and effectively research all of the topics alone. That's where the growth team, other analysts, and other portfolio managers come into play. I spend probably 2/3 of my time keeping track of the companies we own, exploring new ideas and talking to managements and analysts. About 1/3 of my time is spent implementing decisions or talking to present and prospective clients. One way or the other, I am totally involved in the investment process and have nothing to do with departmental administration.

Q: How do you go about identifying industry sectors that appeal to you?

A: It is both bottom-up and top-down. We combine the analysis of our economics department, headed by Dr. Edward Yardeni, with hands-on research by our portfolio managers. Everything we hear, see and observe is distilled and crystallized into our investment themes. We meet with companies, listen to analysts, attend conferences and rely on our experience, among other things, to solidify our focus. We are not much on computerized models. Meeting the people and understanding the numbers behind the companies we own is the most effective method of evaluating an organization. Computers don't always reflect what face to face meetings do. We have extensive contacts among the research departments at other prominent Wall Street firms, which proves to be a valuable source of highlighting industry sectors, themes, and specific companies.

Q: Is most of your research generated in-house or from your outside research sources?

A: I've mentioned the firm's research emphasis since the inception of C.J. Lawrence, and that follows through to our portfolios today. The internal research function has been to produce profitable investment ideas for our clients. We have very fine industry analysts, economists, and market strategist all of whose work is utilized as the primary source of research in our growth approach. Additionally, we use the research of 10-12 outside firms to insure that all bases are covered.

Q: What kind of companies best fit your investment criteria?

A: We figure out the most competitively advantaged companies within the sectors or themes we have identified. We want the best of the breed. We believe that every industry in the U.S. is intensely competitive. Huge rewards accrue to the winner while inevitable underperformance or worse goes to the loser. Sometimes it is best to pay a small premium, in terms of P/E, to get the top dog. Often, at least in the beginning, it's not much of a difference. Ultimately, as in the K-mart-Wal-mart analogy, it can be enormous. We are not value managers and we are not necessarily looking for bargains. However, we rarely pay a large P/E premium for the companies in our portfolios. Bottom line is that our number one criterion is to find the toughest company in a strong trend.

Q: Where would you rank earnings growth as a factor of importance in your decision making?

A: Very high. We determine what the average U.S. company will do in terms of earnings gains for the next two years. We then add a large premium to that average to determine the minimum growth that is acceptable for our companies, hence the name of the style. The average company in the U.S. will grow earnings at about 15% this year and perhaps 10% next. Because we want a premium in earnings, our minimum earnings growth rate is 25%. Obviously, the threshold will change from year to year. For instance, several years ago when the country was in a recession, we were happy to invest in companies with 10-15% annual earnings increases. Thus the importance of this earnings premium leads us to designate our product Premium Growth Equity

Q: How diversified are you between both industry groups and individual stocks?

A: We tend to own between 20 and 30 stocks in a portfolio and we will spread these over 10-12 different themes. We are diversified, but less so than in the traditional sense of the word. If an industry is undesirable, we will not own anything in it at all. If an industry is desirable, we will own plenty of it. At the moment, a variety of basic industries, capital goods and technology investments is our primary emphasis.

Q: Are there any restrictions on a company's capitalization size?

A: No, but our companies tend to be in the mid-cap classification. Market capitalizations will generally be $1-4 billion, and our current average is about $3.0 billion. Size is not a great concern. Liquidity is a factor and generally precludes us from owning very small companies. Further, very small or very large companies tend not to have the competitive advantage we seek.

Q: How do you control investment risk?

A: We attempt to control investment risk through our disciplined purchase criteria. We do not buy turn-arounds, weak managements, potential take-overs, or illusory situations of one kind or another. We try to thoroughly understand our specific investments. This means studying research reports, speaking to or meeting with management and staying current with conference calls with management. Second, we have stringent sell criteria which have significantly cut our failure rate. To put it simply, once a company or industry exhibits signs of weakness, we get out.

Q: Do you consider a client's investment objectives when you design a portfolio?

A: We manage growth portfolios that are suitable only for clients who want this approach. As mentioned earlier, we have a universe of approximately 40 companies from which new client portfolios are constructed. Not every stock in the universe is a buy at every instant. We evaluate the market and specific company environment at the time the new client enters and then add select positions over a one to four month period until the client meets our asset allocation parameters. There are other investment styles at C.J. Lawrence Deutsche Bank Securities Corporation, that would be appropriate for investors interested in income or a balance between income and growth.

Q: What influence does your association with a major German bank have on your firm?

A: It has enlarged our international vision and will continue to do so. We are now in frequent contact with colleagues who do research on European, Pacific Rim, and, to a lesser extent, South American companies. Eventually, as our familiarity builds up, we may invest in these areas in our growth portfolios. Deutsche Bank's commitment to the United States began when the organization invested billions of dollars in American companies through its bank lending operation. You may not realize that Deutsche Bank has over $12 billion in equity capital, over $330 billion in assets, and ranks second in size in the world, excluding Asia. Deutsche Bank Securities Corporation, a subsidiary of Deutsche Bank, is a primary government bond dealer. Despite our size, our investment management division takes pride in its attentiveness to each individual client.

Q: Tell me about your sell discipline.

A: In addition to the general equity sell signals from the Market Monitor, we have three sell disciplines for individual stocks. The first is to sell when a stock becomes so popular and so over-owned that there is, figuratively speaking, no one on Earth left to discover the company. It may be great, but everyone already knows it. This condition is often characterized by the stock no longer advancing amidst an abundance of good news and widespread analyst acclaim. The second sell signal occurs when competitors of the company we own begin to report disappointing earnings. We like a healthy industry when almost all of the important players are doing well. We dislike the reverse. All too often it happens that a competitor's difficulties are felt by the company you own sooner or later. We want out before it occurs. The third sell signal occurs when the company reports disappointing results. This almost always indicates that there is worse to come.

Q: Do you work with any brokerage houses which would allow smaller investors to use your services by allowing smaller minimums?

A: Our minimum is $500,000 for managed growth accounts. Clients have come to us directly and, in many cases, from brokers at other firms. In the latter case, the accounts are domiciled and traded at the introducing brokerage firm. We receive an advisory fee of 1% per year. We also offer a limited partnership called Bennett/Lawrence Partners. The partnership invests as described previously, but has the significant advantage of being able to short stocks.

Q: Who are the others on your research staff?

A: Robert Deaton recently joined us as an analyst dedicated to research on our universe of growth stocks. He came to us from the Tennessee Consolidated Retirement System where he was responsible for the Long Term Growth Fund. His expertise is in fundamental analysis and he investigates concepts that we wish to pursue in our growth portfolios. We also consider the 26 research analysts at C.J. Lawrence Deutsche Bank Securities Corporation as being part of our staff since we have ready access to their analysis. We participate in their daily 8 A.M. research meeting, and a speaker unit on our desks provides research updates during the day as news on companies is announced.

Q: What other investment programs do you offer clients?

A: We offer a range of products designed to meet the needs of investors. Relative Value Equity, Relative Value Balanced, and Fixed Income are the domestic disciplines that we manage. We also have a comprehensive group of Global products which include European small/mid-cap and Latin American fixed income and equities, as well as International and Global fixed income asset management. When you consider our domestic management capability in New York and our access to the Deutsche Bank Asset Management capability in Frankfurt, we have an extensive array of investment management services and the expertise to complement each product.